Vodafone - if you cant beat them, join them!

I had thought the whole issue of tax avoidance had begun to settle down, efforts to stop multinationals shifting profits from the UK to countries with lower tax rates rates has been a crusade this summer. Despite existing legislation for transfer pricing etc a new all encompassing law, the General Anti Abuse Rules, has been brought in to keep more profits taxed in the UK.

This legislation seems to have combatted some of the aggressive tax avoidance that the press and politicians want to see stopped.

Then out of the blue a great success story, Vodafone's sale of its 45% stake in Verizon has brought it all back into the public spotlight.

The £84 billion sale will give rise to no tax liability!

This seems to have upset a few people again. What they seem to forget is that the tax free gain belongs to Vodafone. They have indicated that a very large chunk of this money will be returned to shareholders via a dividend. It is at that point that tax will be charged as it hits the ultimate beneficiary. Why should this be a problem?

After all Vodafone are following the tax rules that exist in most European countries, sales of shares by a trading company in another trading company are tax free under the Substantial Shareholdings Exemption.

In fact it is a very good way of growing businesses, which surely the

UK wants? It also isn't simply there to benefit the biggest companies in the world. Dodd & Co have used it to help farming and tourism businesses to dispose of some of their own business interests without suffering a tax charge.

Wouldn't it be better to celebrate a success, which will in time generate tax for HM Treasury, and preserve reliefs that all businesses can use to help themselves grow rather than inviting more tax?

After all if you cant beat them join them, and make sure your business also makes use of all the available tax reliefs. 

Want to find out if it will work for you? 

You can email me rob@doddaccountants.co.uk

or follow me on twitter @Rob__Hitch

Will the Future of Farming Review help new entrants?

I have read with interest the Future of Farming Review and, as you might expect, the section on Taxation and Tenancies. There are a few key suggestions on tax which I find a little troubling.

There are three main recommendations about tax;

1.    Remove the difference in tax rates between companies and individuals.

2.    Restrict Agricultural Property Relief (APR) to working farmers under 70.

3.    Extend Entrepreneurs Relief to let farmland.

I am not sure these will have the desired effect that the Review wishes. I have explained my reasoning below.

1.    Tax equalisation

It is hard to see the government either increasing corporate tax rates, expected to fall to 20% from April 2015 or decreasing personal tax rates currently between 0% and 62%. The government’s recent consultation on mixed partnerships also suggests that they are not minded to go down this route, wanting to remove the hybrid structure that currently gives businesses the best of both worlds.

Even small businesses such as window cleaners and bookkeepers have incorporated to reduce their tax burden. Like any decision the extra costs and compliance obligations of incorporation need to weighed up against the benefits, just like any other business decision. For some the drawbacks of incorporation, such as the possible loss of 100% Business Property Relief (BPR) on development land, might be too costly. But everyone has a choice of structures, some are simply better suited to an individual’s circumstances than others.

Would a simpler solution be to alter tenancy law to allow landlords to let companies share occupation with tenants without the risk of the company establishing a tenancy, or without the tenant losing succession rights? This shouldn't be an issue with Farm Business Tenancies.

2. Restricting APR to those under 70

The suggestion that restricting APR to those aged 70 or less on land farmed in hand, but maintaining its availability to any age if let, seems a bit strange.

As the Review pointed out BPR would be available on land but not farmhouses, what isn't mentioned is that BPR is only available at 100% where it is an asset in your trading business, i.e. farmland held as a partnership asset. If however the land is held outside the partnership and let on an FBT it would still attract 100% APR but only 50% BPR.

Given that BPR is available on pretty much everything bar the farmhouse on a working farm, will this make any difference? One of the attractions of holding farms till death is the valuable Capital Gains Tax uplift to market value that is sheltered by the IHT reliefs. This will still be available so unless farmers have valuable farmhouses will this make any difference?

Will it encourage farmers to let the farm or simply sell up, the latter generally acknowledged as being a bar to new entrants?

3. Making let land qualify for Entrepreneurs Relief.

This in my mind seems the most ill-conceived idea!

One of the downsides to owning land as a landlord is that any gains are likely to be taxed at the highest Capital Gains Tax rates. Gains however are eliminated with an uplift to market value on death as long as IHT reliefs are available to prevent an IHT charge.

This uplift effectively reduces the Capital Gains Tax rate to 0% which makes the holding of land until death very valuable. So owning let agricultural land is an ideal investment for passing wealth to the next generation.

Reducing the existing tax rate on sales of let property will only make it a much more short term investment, if I can buy land let for a year and sell at a gain why wont I? Surely the existing rules, that already give a CGT uplift on death, encourage longer term holdings and are more likely to encourage longer term letting?

More speculative investment in land driven by tax changes will only shorten tenancies and push up land prices, both of which will hamper new entrants.

These are obviously just my thoughts but tinkering with some of these issues might result in unintended circumstances, many non farmers, including some of my work colleagues think that there are too many tax reliefs for farming. Will the industry’s drive to encourage succession lead to tax changes that are detrimental to the majority?

You can follow me on twitter @Rob__Hitch

Contract dairy farming - Do landlords hold all the aces?

I have a corporate finance partner who thinks that farmers benefit from lots of tax breaks, whether on income, capital gains or inheritance. Looking after the accountancy and tax affairs of farmers I obviously disagree with this sentiment!

But are some of the everyday 'tax benefits' that farmers enjoy being denied to active farmers by landlords who hold all the aces?

I have recently been looking at a number of dairy contract farming arrangements for clients, having been involved with several joint venture operations in the sector over the last fifteen years. I have been struck by how much these are in favour of the landlord/landholding party. 

Having seen fluctuating profits in recent years, and the loss of herds with FMD in the past, some of the most beneficial tax breaks for farmers seem to be missing from the structure of many modern joint venture agreements. 

It seems today the popular method for joint ventures is contract farming, this is a business structure that has evolved in the arable sector and has more recently been adapted for dairy farms. 

In these structures the contractors are providing a service to the farmer and as such are not actually farming themselves. Whilst they should earn higher profits, they get this reward for the provision of services, not for husbandry. 

The main problem with this is that whilst the contractor isn't farming they cannot benefit from farmers averaging, so a bumper year one year that leads to high rate tax liability can't be averaged with a poorer preceding or following year. 

This in itself might not be too bad, but all too often cows are owned by the contractor, to keep matters above board these are often hired to the farmer. In practice the contractor earns income from the cows in the form of a rental, not from the sale of produce, either milk or calves. This means that they are not able to benefit from the advantages that herd basis elections give farmers. 

This might not appear to be a big issue but the experience of seeing herds culled for disease control shows what a benefit this can be. What happens if animals are culled with TB and tax free status can't be achieved?

And if herds of cows are hired out, are they still business assets for IHT purposes?

All these downsides lead me to think that the use of contract farming agreements in the dairy sector comes down firmly on the side of landowners or occupiers.

It may be the only structure that allows tenants to enter a joint venture but why don't more landlords consider share farming which preserves all of their capital and income tax benefits whilst also letting the other party keep theirs?


If you want to know more drop me an email rob@doddaccountants.co.uk or you can follow me on twitter

Will Farmers be the losers from today's budget?

The fallout from George Osborne's budget today seems to me mostly favourable. Headline  cuts to Corporation Tax and the raising of the Personal Allowance to £10,000 next year have won plaudits, not too mention the CUT in beer duty!

But also announced by the chancellor was a raft of anti avoidance measures. Two items that haven't received many headlines may have a significant impact upon the affairs of farmers.

IHT Changes

The first is the introduction of legislation to prevent the claiming of IHT relief on some loans. Whilst this appears a sensible approach on closer reading of the proposed rules http://www.hmrc.gov.uk/budget2013/tiin-2006.pdf shows that these rules will also impact on those with loans to buy assets that qualify for IHT reliefs such as Agricultural Property Relief (APR) and Business Property Relief.

It seems that HMRC are looking to set any loans against the asset for which they were taken. This differs from the current legislation that sets loans against the assets that they are secured against.

In recent years this has led to many farmers with debt to secure their loans on property that doesn't qualify for IHT reliefs. So whilst a farmer might borrow money to buy land they would secure the loan against a let house or valuable farmhouse to reduce the value of any chargeable assets on death.

The proposed legislation, drafts will be released next Thursday, suggests that this treatment will no longer be appropriate exposing many assets to IHT. No doubt HMRC will be looking at the purpose for which loans are taken out rather than what they are secured on.

Partnership profit shares

The other issue raised today was the announcement of consultation into the sharing of profits in partnerships.

In recent years partnerships, in which you can share profits as partners agree, have proved very flexible for families minimising their tax burden. Whether this has been by allocating profits to a corporate partner or an elderly partner to avoid National Insurance, significant tax savings have been achieved.

This has been even more evident with Tax Credits as young families have restricted profits to claim tax credits and elderly/company partners have shared profits and paid reduced rates of tax.

This is particularly prevalent in family businesses owned by several generations, which farming businesses almost always are. 

We will await the consultation document with interest as it might provide one of the biggest changes to the taxation of farm businesses for many years. Coupled with the IHT changes announced I can't help feeling that this wasn't the best budget for farmers. 

Update - Loans to Participators

The anti avoidance introduced for loans to participators might also have a big impact on corporate partners, not just in the farming world. 

As a firm we have always taken a cautious view of corporate partners but some people have introduced them to partnerships, and allocated them all the profits. Over time the company capital account in the partnership increases with the individuals capital accounts reducing and sooner or later becoming overdrawn.

New legislation will treat these overdrawn capital accounts as an overdrawn directors loan, giving rise to a 25% S455 tax charge. This should be repayable but already there is speculation that this repayment might end giving rise to a permanent tax charge. 

You can find out more about today's budget on Dodd & Co's website or email me or contact me on twitter if you have any questions. 

Inheritance tax looms for holiday cottages

So the long awaited decision from the Upper Tier Tax Tribunal has been released in the NMRC v Executors of Pawson.

HMRC sought to deny Business Property Relief on a holiday cottage. At the First Tier Tribunal ruling the decision went in the taxpayers favour, with the tribunal ruling there was sufficient activity to make the holiday letting a business. 

HMRC were given leave to appeal on the grounds that the FTT had erred on the basis that;

It formulated and applied the wrong test in assessing whether the Property was held wholly or mainly as an investment. 

Needless to day HMRC won the appeal, details can be found here. HMRC v 1 Lockyer 2 Robertson for Nicolette Pawson

What does this mean for holiday cottages? 

The obvious answer is no inheritance tax relief. For many farmers however Business Property Relief may be available if the holiday cottage is part of a mainly trading business, i.e. a farm. In most cases holiday cottages, like bed and breakfast facilities, have been moved outside the farm business in order to avoid VAT registration. 

So to attract Inhertiance Tax relief will farmers and others have to give up the benefit of not being registered for VAT, effectively increasing the price of their property?

More information will be posted on http://www.doddaccountants.co.uk/ on Monday

You can follow Rob on twitter  @Rob__Hitch

Will loss cap reduce the benefit of increased Annual Investment Allowance?

The increase in Annual Investment Allowance to £250,000 has been well timed with farmers heading to LAMMA this week. Businesses thinking of spending this sort of sum on new equipment may after a miserable harvest create a substantial trading loss.

Historically this hasn't presented much of an issue as losses could be carried back and relieved against other income or capital gains. From 6 April 2013 however these reliefs will be capped at the higher of £50,000 or 25% of your income. So if you have a year end that falls after 6 April you may find the use of any losses created restricted.

In order to get the most tax relief and get it quickly farmers normally want to carry back losses or use against other income or capital gains.

If we consider Mr & Mrs Barley who have a 30 April year end we can see the impact of this.

In their accounts to 30 April 2012 the Barley's made £250,000. The tax that is due on this would be £86,252, plus £9,577 in national insurance. This would all be due on 31 January 2014!

In their accounts to 30 April 2013 they make a £200,000 loss after capital allowances. Under the old rules they could have claimed for this loss on their 2012/13 tax return and reduced their tax payment in January 2014 to £9,890.

As their year end falls in the 2013/14 year they will have their use of losses capped.  This means that the Barley's can only claim £100,000 of the losses against their previous years profit. This will mean they have a tax & NIC bill of £47,346. 

They will be able to average when they complete their 2013/14 tax return but this will only save a further £8,061, reducing their total liability to £39,284.

Because they have already used £50,000 of losses, by carrying back, their unused losses of £100,000 will have to be carried forward against future farming profits, and not too many forecasters are expecting the 2013 harvest year to be a bumper one.

The effect of this is to increase the total tax bill on the combined 2012/13 and 2013/14 profit / loss by £29,394.

So when tempted by that new piece of kit and the generous tax allowances make sure you work out exactly how it will impact your business and cashflow.

If you find yourself in this position you may want to look at other options to improve the situation.

If you’ve enjoyed this why not follow me on twitter? @Rob__Hitch